DERBYSHIRE COUNTY COUNCIL Pension Fund Annual Report Year ended 31 March 2015 Pension Fund Annual Report for the Year ended 31 March 2015 Page Introduction 3 A Management and Financial Performance 5 B Investment Policy and Performance 10 C Arrangements for the Administration of the Fund 14 D Pensions Administration Strategy-Fund Activity 20 E Fund Account and Net Asset Statement 22 F Auditor’s Opinion 56 G Actuary’s Statement - Actuarial Valuation Report 2013 59 Appendix 1 – Governance Policy Statement - Investments 78 Appendix 2 – Governance Policy Statement - Pensions 82 Appendix 3 – Statement of Investment Principles 86 Appendix 4 – Funding Strategy Statement 99 Appendix 5 – Schedule of Employees’ and Employers’ Contributions 139 Appendix 6 – Communications Policy Statement 144 Introduction Derbyshire County Council is the administering authority for the Derbyshire Pension Fund under the terms of the Local Government Pension Scheme (Administration) Regulations 2008 (the Regulations). This report has been produced in accordance with Section 34 of the Regulations. It aims to set out the way in which the Pension Fund is managed both in relation to the administration of benefits and to the investment of the Fund. Details of investment performance are provided for 2014-15 and over the longer term and these are compared with benchmark index returns and local authority average returns over the same periods. The major development in respect of investments during the year was the decision to switch the European Equity Portfolio, currently managed externally by UBS Global Investment Management, from active to passive management. 2015-16 will see the production of a new Statement of Investment Principles, incorporating a revised Asset Allocation. In terms of administration 2014-15 has been a particularly dynamic year on a number of fronts. It was the first year since the change of scheme basis from ‘Final Salary’ to ‘Career Average Revaluated Earnings’ (CARE), which has challenged not only the pensions administration team, but also the Fund’s employing authorities and the pensions and payroll software providers. The challenge was exacerbated by the switch from 1 December 2015 to a new pensions administration system. This involved the migration of 90,000 records, the development of new processes and a full program of staff training. The Fund’s accounts for the year are included in section E of the report whilst the Actuary’s latest statement under Section 77 of The Local Government Pension Scheme Regulations 1997 is included in the Valuation Report under section G. Further information relating to the Fund is available on Derbyshire County Council’s website at http:--www.derbyshire.gov.uk-working for us-pensions-. 3 Pension Fund Annual Report 2015 - Updated 21.9.15 This page is intentionally blank 4 Pension Fund Annual Report 2015 - updated 21.9.15 A Management and Financial Performance 1. Investments Responsibility for the investment of the Pension Fund is delegated to the County Council’s Pensions and Investment Committee. The Committee comprises members representing Derby City Council as well as the County Council. Employee representatives attend as non-voting members. During 2014-15, the Committee received advice from the County Council’s Director of Finance and 2 independent Investment Advisers: John Somers (Aviva Investors) Philip Williams (Independent) John Somers ceased to be an advisor to the Fund from 31 December 2014 following Aviva’s withdrawal from advisory services. Pensions and Investment Committee Membership 2014-15 As at 31 March 2014 As at 31 March 2015 County Councillors W Burrows (Chair) J Frudd D Collins P Dunn R Davison R Davison S Ellis S Ellis S Freeborn S Freeborn M Longden M Longden S Marshall-Clarke (Vice Chair) S Marshall-Clarke (Chair) D Wilcox D Wilcox (Vice Chair) Derby City Council Councillors D Roberts B Shanker M Titley M Titley Employee representatives attend the meetings as non-voting members P Berrisford (Unison) P Berrisford (Unison) N Read (Unison) N Read (Unison) 5 Pension Fund Annual Report 2015 - updated 21.9.15 Terms of Reference With regard to the Fund’s Investments, the main powers and duties of the Pensions and Pensions and Investment Committee are based on the provisions of the Local Government Pension Fund (Management and Investment of Funds) Regulations 2009, and the Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 2013 which are designed to ensure that the Fund is properly and effectively managed. The main responsibilities of the Committee are as follows: Statutory Duties • To appoint managers, advisers etc • To monitor performance • To determine an investment policy having regard to: The advisability of investing in a wide variety of investments The suitability of particular investments and types of investments The above Regulations require that advice should be taken in carrying out the above duties. • To produce and publish the Fund’s Statement of Investment Principles which sets out the Fund’s policy and its compliance with Myners’ Principles for Institutional Investment. • To produce and publish the Fund’s Governance Policy Statement • To produce and publish the Fund’s Communications Policy Statement. The Statement of Investment Principles, Governance Policy and Communications Statements have been produced by the Pensions and Investment Committee and are available on the Council’s website. Other Duties • Investment decisions relating to unquoted investments such as direct property, private equity and infrastructure. • Voting decisions not covered by voting guidelines Committee minutes are reported directly to the Council. 6 Pension Fund Annual Report 2015 - updated 21.9.15 Investment Management The Fund’s investment assets are managed as follows: (a) UK bonds, International bonds, UK equities, Japanese equities*, Asia Pacific equities*, Emerging Market equities*, Infrastructure and Private Equity. (* through pooled investment funds) By the in-house team comprising: Peter Handford (Director of Finance) Richard Appleby (Assistant Director of Finance) The Investment Section Investment Management Steve McManus (Investment Officer)* Richard Fanshawe (Fund Manager) Julian Green (Fund Manager) David Henry (Fund Manager) Vanessa Jacka (Fund Manager) Dawn Kinley (Fund Manager) Neil Smith (Assistant Fund Manager) Christopher Gooding (Research Analyst) *Steve McManus left the Fund in December 2014. Dawn Kinley is now the Acting Investment Officer. Accounts-Treasury Management-Administrative Support Rajwant Dosanjh/Sarah Wainwright (Pension Fund Accountant) Jonathan Clarke (Senior Assistant) Lesley Crowder (Settlements Officer) Catherine Bedford (Investment Clerk) Abbie Casey (Investment Clerk) (b) Direct Property Keneth Peters & Co (Advisors and Agents) (c) European Equities UBS Global Investment Management (in a passive capacity) (d) North American Equities Wellington Management International (in a discretionary capacity) 7 Pension Fund Annual Report 2015 - updated 21.9.15 2 Financial Performance The costs of managing the pension fund in 2014-15 were as follows: Cost Cost per £000s Members member Investment Management 4,742 89,868 £52.77 Pensions Administration 1,543 89,868 £17.17 Actuarial-Audit fees 92 89,868 £1.02 Asset Allocation 31 March 2015 The Fund’s asset allocation as at 31 March 2015 was as follows: 40% 35% Benchmark Actual 30% 25% 20% 15% 10% 5% 0% The Pension Fund added to UK equities, reinvesting the majority of UK equity income received. Equity holdings in Europe, and Japan were also increased on attractive opportunities. However, equity holdings in the US were reduced as the US market became increasing expensive compared to other markets. The Fund also reduced its exposure to Index Linked Bonds following very strong performance in the asset class, and switched some monies from Private Equity to Infrastructure, in addition to investing new funds in Infrastructure. 8 Pension Fund Annual Report 2015 - updated 21.9.15 The Pension Fund’s targets The Fund’s targets are as follows: To beat the actuary’s long term assumptions of returns (currently an investment return of 4.6% pa) To outperform the Fund’s benchmark index return by ¼% over 1, 3, 5 and 10 year periods Market Background 2014-15 Equity markets continued to perform strongly in 2014-15, although there were notable regional differences. Japan was the strongest performing major developed market with a total return of 27.1% to UK investors, followed by the US which returned 25.1%. The US return to UK investors was boosted by the strength of the dollar from the summer onwards, accounting for almost half of the annual US equity return. UK equities returned a more modest 6.6%, constrained by the heavy resource weighting in the UK market, and worries ahead of the May 2015 General Election. Pacific Asia ex Japan and Emerging equites bounced back from the previous year, returning 12.8% and 16.3% respectively. Bonds performed strongly in the period, after a disappointing 2013-14, with Conventional Bonds returning 13.9%, Index Linked 18.6%, and Corporate Bonds 13.6%. Long dated bonds performed particularly well, with yields hitting historic lows. Spreads between corporate and sovereign bonds tightened slightly after widening over the winter months. Property had another strong year returning 18.3%, boosted by falling yields and increasing evidence of rental growth. 9 Pension Fund Annual Report 2015 - updated 21.9.15 B Investment Performance Investment performance is calculated independently